Buying from a wholesaler - why no EMD contingencies?

Question

Hello BP! Looking at a wholesale deal in Baltimore city (21213). It's a townhome in pretty good shape on a good street in BelAir-Edison (Pelham). Wholesaler wants $39K cash to close. No contingencies.

Question: I've never worked with a wholesaler and the idea of putting down an EMD that I can't get back if there's some major foundation issue (or the like) seems ludicrous.

Is this standard practice or is this too much risk for a first-time cash buyer to take? Can I request to bring in an inspector before putting down an EMD?

At $39K - even with a $30K rehab - the numbers work great for buy-and-hold on this street.

I've been scouring forums and blog posts and it seems that one area where the info is a little thin on BP is how to work step-by-step with wholesalers for the first time! Any input would be greatly appreciated. Thanks in advance!

Steve Vaughan · Answer

Wholesalers in general are uneducated and unregulated and generally shady.  They are after a quick payday and that's it.  Forget you.  Forget the seller.  There are exceptions to this rule, but I would assume these things going in.

How much of an EMF (earnest money fee) is being asked for @Julie Hassett?  Have you seen the property yet, inside and out? Is it an amount worth the risk of not seeing again? A roll of the dice?

Whatever you do, give the EMD/EMF to a title co or closing attorney, not the wholesaler personally.  Verify this place is actually and appropriately under contract.  File a memorandum of sale or option or some such doc that puts the public on notice you have an agreement.  Protect yourself!

Wholesalers - save the hate mail.  If you are one of the few that act above board and can see passed your little payday, I respect what you do and already know who most of you are.  There just aren't enough of you :) Peace!

Jamal L. · Answer

@Julie Hassett

All seems to be accurate except for a few minor details.

4) I contact title company to ensure clear title.  Thats the only contingency in wholesale transactions, if the title doesn't clear you get your deposit back. If the property isn't being prompted as already with a clear title, it'll take the title company a few days to check for a clear title.  But make sure the contract specifies that if there isn't a clear title you get your deposit back.

5) Contact the owner to ensure proper contract.  Ask for the original purchase agreement from the wholsaler with the signature of the owner and match that name with the name on with the owners name on title.

You can put on the contract that the seller vacates as a contingency to the deal.  And either set the date of closing after the date they are supposed to move or ask that the funds of the sale go into the title companys escrow account until the tenant vacates the premises.

Hope this Helps til next time Stay Inspired!

Steve Vaughan · Answer

How do I verify that the property is properly under contract like you suggested, Steve?

I would look at the contract and contact the owner to verify @Julie Hassett .  Pay to a 3rd party like a title co or closing attorney only.

Make sure the wholesaler doesn't have multiple buyers giving them EMDs somehow.  When you talk to the seller/owner ask.  There number should be on the contract in my experience with PSAs. Hopefully others will chime in.  I don't play in the shade that often.   Good luck!

Ned Carey · Answer

Julie,

You don't get contingencies when you buy at auction either. When I wholesale I see on what I call investor terms - just like an auction no contingencies. I would rather wait for a buyer that I know will buy than sell to someone with contingencies. You are free to get an inspection, prior to writing the contract.

I would say I will give you a refundable $1,000 for $X price or a first right of refusal on a higher offer, in return for a 3 day inspection period. After three days your deposit goes "Hard" This means no risk to the wholesaler to losing a sale to someone else because you tied up the property.

JJ Conway · Answer

@Julie Hassett

Here was my experience with the last property I bought with a wholesaler in Baltimore City:

He "sold" the contract auction style - I was the highest bidder and the wholesaler sent me several documents, including a copy of the contract between him and the owner (plus an addendum lowering the price because my offer would have ate into the wholesaler's $3K profit).  I wrote a non-refundable $100 check to take it off the market and a non-refundable $10 check to him for the earnest money he gave the owner ($10).  Check was written to the title company.  Contract I signed with the wholesaler required me to follow up with a $1000 "real" earnest deposit within 48 hours of clear title, which I did. Had I backed out, I would have lost the $1110 invested up to that point (which I think is reasonable considering the time, energy, and title work). All of these checks were written to the title company except the $10 directly to the wholesaler. I went to closing, along with the wholesaler and original owner at the title company and we completed the transaction.  One thing I would have done differently is charged the owner a squatter removal fee. Definitely insist on a walk-through because people lie. I *did* and there was a fair amount of trash left behind but the property was in good condition so I let it go. I shouldn't have because it turned out the previous tenants relative was squatting.  And it was a little scary to get him out. I didn't want to press the issue because the owner was walking away with so little profit, but now seeing all the work it took to get that property up and running he would have been happy at $0 profit just to get rid of the liability (still was a very profitable deal for me though!!).

Ned Carey · Answer

@Julie Hassett and others reading along. When you buy a property from a wholesaler, unless the wholesaler double closes, you are not buying a house. You are buying a contract. Well you are also buying  a house from the seller/owner, but from the wholesaler you are buying a contract. Always read and understand the contract you are buying (being assigned to you) .

If you haven't already, I would give the contract to Holly Edelstein from Clearview title. A good title company that understands Baltimore city ad investment properties is important.  The title company will scheduled closing. For most title companies that means 3 days to 3 weeks after the contract expires :-)   They will schedule when the title company is ready and they will (Hopefully) coordinate with the buyer and seller. Buyer and seller do not necessarily come at the same time, but that is best.

The point of the option was simply to buy time so that you could have an inspection and have an out. The idea is to make the wholesaler comfortable with the idea of giving you three days ( 3 is not magic number, what ever you can agree to) and have an out himself if another buyer comes along.

I don't agree completely with @Steve Vaughan, I think a lot of the problem is ignorant & inexperienced new wholesalers rather than arrogant "what is in it for me" types.  There is nothing wrong with screening the wholesaler. Ask "how many wholesale deals have you done."  "What title company do you prefer.?" Ask any question that requires him or her to come up with specific details. Turn on your BS meter and listen for the answers. A good wholesaler will be able to guide you through a deal.  He or she wants that deal to close. A faker will just get in the way.

Regarding the tenant, ideally if you were dealing directly with the owner you could say something along the lines of "the contract may be extended buy the buyer at the buyers sole option until the tenant vacates.     " Otherwise cash for keys or go through the legal process to get the tenant out.

You are legally bound to honor any lease with the current tenant. If the current landlord has not given appropriate notice for the tenant to leave you could have a frustrating problem getting the tenant out.

Sean Cole · Answer

@Julie Hassett if you call the owner and ask if it's legit, you'll probably wind up tubing the deal for yourself because the wholesaler won't want you interfering in the other contract.  There's an argument to be made that contacting the current owner about the contract between he/she and the wholesaler is tortious interference if the wholesaler's deal blows up as a result.If they're doing an assignment, you'll see a copy of the wholesaler's contract with the seller anyway because you'll have to initial and sign everywhere that the wholesaler did.

Jeff B. · Answer

FRR says that the seller can not accept and go forward until YOU match the offer or rescind the FRR.  Usually there's a small window of time for you to affirm the Match and the rescinding is the default position for lack of response within that window.

Jay Hinrichs · Answer

@Julie Hassett  you could just look at it as the cost of doing business... 1,500 bucks is nothing if you lost it.. and you probably won't.. people really get hung up on these small dollars

Julie Hassett · Answer

Thanks, Jeff Beard !

Just to outline the actual steps if I move forward to make sure I got them correct:

1) contact the wholesaler and tell him I'll give him the $1,500 EMD for a three-day FRR/inspection process

2) He sends me a purchase sale agreement to sign

3) I sign the contract and deposit the $1,500 in escrow

4) I contact title company to ensure clear title

5) I contact owner to ensure proper contract.

6) I hustle to get an inspector into the property within three days

7) If all checks out to my satisfaction, I move ahead with the purchase.

Lastly, what kind of guarantee can I require that the current tenant vacates by the end of the month?

You guys are awesome. Thanks a million!

Buying from a wholesaler - why no EMD contingencies?

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